Executives
Chip Merritt - Senior Director, IR
Frank Baldino - CEO
Kevin Buchi - CFO
Bob Roche - EVP, Worldwide Pharmaceutical Operations
Lesley Russell - EVP, Worldwide Medical and Regulatory Operations
John Osborn - General Counsel
Analysts
Greg Gilbert - Merrill Lynch
Brett Holley - CIBC World Markets
Donald Ellis - Thomas Weisel Partners.
Adam Greene - J.P. Morgan
Corey Davis - Natexis Bleichroeder
Eric Schmidt - Cowen and Company
Jim Birchenough - Lehman Brothers
Michael Rockefeller - Morgan Stanley
Gary Nachman - Leerink Swann
David Buck - Buckingham Research Group
TRANSCRIPT SPONSOR |
Cephalon, Inc. (CEPH) Q4 2006 Earnings Call February 12, 2007 5:00 PM ET
Operator
Good day, everyone, and welcome to the Cephalon Fourth Quarter 2006 Earnings Announcement. Today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Senior Director, Investor Relations. Please go ahead, sir.
Chip Merritt
Thank you. Today we will review Cephalon's financial performance for the fourth quarter of 2006 and for the full year 2006. Before we begin, let me remind you that certain statements on this call may be forward-looking, and are subject to risks and uncertainties associated with the company's business. These statements may concern, among other things, guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials and a potential approval of our product candidates. The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in the news room section of our website at www.cephalon.com.
Additional information on risk factors affecting the company's business and financial prospects, and factors that would cause Cephalon's actual performance to vary from our current expectations, is available in the company's current Form 10-K on file with the SEC.
During this call, we will introduce first quarter 2007 guidance and update our full year 2007 guidance. Please note that guidance will remain in effect unless the company provides subsequent modifications or updates. Our earnings press release is available on the Internet at www.cephalon.com. Investors with further questions should contact me at 610-738-6376. This conference call is being webcast via the Cephalon home page and will be archived for one week after the call.
Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer and Kevin Buchi, Chief Financial Officer. Also joining us today are Bob Roche, Worldwide Pharmaceutical Operations; Lesley Russell, Worldwide Medical and Regulatory Operations; and John Osborn, General Counsel. Following remarks by Frank and Kevin, we will be pleased to answer your questions.
Now, Frank Baldino.
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Frank Baldino
Thanks Chip. Good afternoon everyone. Welcome to our rescheduled conference call. We originally planned the call for February 14 before my wife and many of you reminded me, it was Valentine's Day. I hope that we all can now enjoy Valentine's Day.
Today we are going to present highlights from 2006, talk specifically about the fourth quarter and discuss our expectations for 2007.
Let me start with the 2006 highlights. In 2006, we reported exceptionally strong top and bottom-line performance. Adjusted sales increased 48% over 2005 and basic adjusted income per share increased at an extraordinary 92%. This performance was driven predominantly by strong sales in our CNS and pain franchises. We secured important new intellectual property with a patent that will protect NUVIGIL through 2023. We successfully executed the transition of ACTIQ for generic OTFC and launched our next generation fentanyl product, FENTORA, which has been received enthusiastically by pain care physicians.
We launched VIVITROL, the first and only monthly injection for the treatment of alcohol dependence. We made progress toward our NDA filings with two important cancer products, TREANDA for non-Hodgkin's lymphoma and CEP-701 for acute myelogenous leukemia, both of which are currently in Phase III clinical trails. We filed an IND for CEP-11981, our VEGF/Tie2 kinase inhibitor for solid tumors, and we significantly strengthened our balance sheet by reducing our debt by $437 million.
All told, 2006 was an outstanding year. We are very pleased by the increased rate growth of PROVIGIL in 2006. The most recent IMS data shows that their fourth quarter prescriptions grew 20% over the fourth quarter of 2005. It is amazing that this remarkable product continues to grow at an accelerated rate after eight years on the market.
Now, after our co-promotion with Takeda, we expect significant increases in utilization of PROVIGIL by primary care physicians. These physicians see millions of obstructive sleep apnea, shift work sleep disorder patients, most of whom go untreated today. In addition to the 500 Takeda sales reps marketing PROVIGIL in the second position, Takeda added 250 representatives in January to detail PROVIGIL in the first position. These reps will have greater incentives for detailing the products.
Today the total number of representatives selling PROVIGIL is nearly 1200. Takeda's positive impact should be realized in 2007, as we significantly address the primary care market. PROVIGIL is well positioned to become our first billion dollar drug.
Our next generation CNS product NUVIGIL has a March 31st PDUFA action date and we continue to believe that we will receive an approval at that time. We remain encouraged that the FDA is reviewing the data and considering the expert opinions considering that single cases for serious skin rash in a pediatric patient from our SPARLON trials. The agency continues to evaluate how best to properly characterize this case in both the NUVIGIL and PROVIGIL labels. We continue to expect minimal impact to our brands as a result of new labeling, because neither of these products is approved for children.
In November, we were pleased to announce that we secured a Composition of Matter Patent on the polymorphic Form I of armodafinil, which is the most stable crystalline form contained in NUVIGIL. This patent should provide strong protection for our wakefulness franchise through 2023.
After discussions with physicians and other thought leaders, we are aware of a number of conditions where doctors believe NUVIGIL may provide additional benefits to patients. As a result, we are initiating a comprehensive clinical program in bipolar depression, cognition in schizophrenia and excessive sleepiness and fatigue in conditions such as Parkinson's disease and cancer, so as to develop a better label for NUVIGIL in the years ahead. With PROVIGIL secured until 2012, we plan a transition of wakefulness franchise to NUVIGIL around 2010.
The launch of FENTORA exceeded our expectations. Rapid-onset opioids are extremely important therapy for individuals suffering breakthrough pain or onset of painful episodes occurring rapidly and often without warning. Feedback from physicians and patients has been consistent and indicates that the value of the speed of onset, ease of use, and the sugar-free formulation of FENTORA. We expect that these advantages will result in increased use of FENTORA for the treatment of breakthrough pain at the expense of short-acting opioids such as Percocet, morphine, Vicodin and Dilaudid. We are also excited about the flow of positive data supporting clinically utility of this exciting new product. We announced last quarter positive results from Phase III trial of FENTORA for the management of breakthrough pain in opioid-tolerated patients with chronic lower back pain. One of the highlights of this study was the fact that FENTORA delivered statically significant pain relief versus placebo at 10 minutes, which is faster than its current label.
We also recently announced positive data with FENTORA treating individuals with breakthrough neuropathic pain and breakthrough cancer pain, both with statistically significant pain relief versus placebo at 10 minutes. We will have a meaningful presence at the American Pain Society Meeting in May with six poster presentations that will share with physicians for the first time data on these studies.
Pending positive data from an ongoing 12-week study in patients with non-cancer breakthrough pain, our goal is to submit an sNDA in the second half of 2007 to expand the label indication for FENTORA. Keep in mind, that at its peak, ACTIQ was used by only about 50,000 patients.
Expanding the FENTORA label to non-cancer breakthrough pain will provide us with a significant opportunity to bring this product to a new market of 2 million to 3 million additional patients. We are convinced that FENTORA will be a very successful drug.
In our pain franchise, we’ve been extremely pleased to retain a substantial portion, roughly 75% of the rapid onset opioid market. We executed our transition strategy and the results in our pain franchise have been better than we expected. With the successful launch of FENTORA and the progress in label expansion program, we are well positioned to grow our pain franchise for many years to come.
In 2006, we also launched VIVITROL. Over the past six months, we have approached the addiction market much the same way we approach the breakthrough cancer pain in wakefulness markets, one doctor at a time and one patient at time. Physician feedback continues to be positive and our product sampling program that started in December has streamlined the process of getting the drug to the patients when they need it.
Sales continue to trend positively. Fourth quarter sales doubled over the third quarter to approximately $2 million. We fully expect strong sales growth to continue and our confidence is bolstered that this will be a successful drug over time.
Turning now to our oncology business, the National Cancer Institute recently reported impressive results from a nearly 600-patient clinical trial using our first oncology product TRISENOX for the treatment of acute promyelocytic leukemia. This study demonstrated that TRISENOX improved survival of adults with APL when used in combination with standard chemotherapy as part of our first-line therapy. Currently, TRISENOX is only indicated for relapsed or refractory APL patients.
We believe that TRISENOX will become the standard of care in front-line APL. A complete scientific presentation of these study results has planned for the Annual Meeting of the American Society of Clinical Oncology in June 2007.
We remain on track and enthusiastic about our clinical studies for TREANDA and CEP-701. Our Phase III clinical study of TREANDA for the treatment of non-Hodgkin’s lymphoma will be completed this year and we're targeting a fourth quarter 2007 NDA filing. We're also planning to study TREANDA in additional indications such as chronic lymphocytic leukemia, mantle cell lymphoma, and small cell lung cancer.
The Phase III program for CEP-701, our small molecule, orally-active FLT3 inhibitor for acute myelogenous leukemia is on a similar timeline for completion of this study in late 2007 and an NDA submission plan for early 2008. We also plan to initiate studies of CEP-701 in patients with myeloproliferative disorder in 2007 on the basis of its ability to inhibit JAK-2.
TREANDA and CEP-701 give us two viable oncology products with the potential to reach the market in the near-term.
Running out on our oncology portfolio is the orally-active small molecule VEGF/Tie2 inhibitor targeted for solid tumors, which recently entered Phase I. We look forward to sharing more about these exiting new opportunities at our R&D Day June 28 in New York.
In summary, we delivered exceptionally strong performance in 2006. In 2007, we look forward to continuing strong growth, particularly from PROVIGIL and FENTORA, and we expect that 2007 will also be the year when the potential of our developing oncology franchise begins to be realized.
Now, Kevin will discuss our financial performance during the period.
Kevin Buchi
Thank you, Frank. Today, we reported our 2006 financial results. Our adjusted sales were $1.7 billion, an increase of 48% over 2005. Basic adjusted income per common share was $5.54, an increase of 92% over last year’s number.
Sales came in $32 million over the high end of our sales guidance range due to robust sales of PROVIGIL and continued strength of our pain franchise. Compared to 2005, CNS franchise adjusted sales increased 34% to $786.3 million. PROVIGIL prescriptions increased 18% to more than 2.6 million scripts for the year.
Pain franchise sales, which included ACTIQ sales of $572.1 million, generic OTFC sales of $54.8 million, and FENTORA sales of $29.3 million, totaled $656.2 million, an increase of 59% over 2005.
Sales of our other products were $264.4 million, a 66% increase over the same period last year, primarily due to the addition of MYOCET, ABELCET, and TARGRETIN in Europe.
At year-end, wholesale inventory levels of our US-branded products continue to represent approximately two weeks of sales. During the quarter, we shipped launch quantities of our generic OTFC. At the end of the quarter, there were roughly 2 to 3 months of inventory of this product in the channel. Our adjusted effective tax rate for the year was 35%, generally in line with our prior guidance.
During the fourth quarter, several adjustments were made to arrive at adjusted net income. The most significant of these were: we excluded $40.5 million in charges related to payments for several research and development collaborations, we excluded $21 million associated with the ongoing amortization of acquired intangible assets, we excluded $48.1 million of non-cash debt exchange expense associated with the December retirement of $337 million of our zero coupon convertible subordinated notes and $100 million of our 2% senior subordinated convertible notes. We excluded $7.4 million of expense related to the adoption of stock option accounting rules associated with SFAS 123R.
We delivered exceptional sales and earnings in 2006, but substantially exceeded our initial sales and earnings guidance. We reinvigorated PROVIGIL growth with the strong sales and market efforts. Our pain franchise was stronger than expected, due to a well executed launch of FENTORA combined with slower than excepted erosion of branded ACTIQ. The strength of our business translated into robust cash flow generation with net cash provided by operating activities up 72% from 2005 to $320 million. In December, we utilized approximately $175 million of this cash along with 4.3 million shares of stock to reduce our debt by $437 million.
Turning to 2007, our adjusted sales guidance remains between $1.675 billion and $1.725 billion. 2007 sales guidance for the CNS franchise is now between $950 million and $975 million. Sales for the pain franchise is between $375 million and $400 million, and our guidance range for other product sales is between $325 million and $350 million.
Beginning in 2007, we will no longer exclude stock option expense from our guidance. This will result in the inclusion of approximately $30 million of pre-tax expense divided more or less evenly between R&D and SG&A. Including this charge we expect R&D expenditures to be between $325 million and $345 million. SG&A expenditures should be in the range of $695 million to $725 million.
Our assumed tax rate for the year remains at approximately 35%. We are raising our guidance for adjusted net income to between $259 million and $265 million. Our guidance for basic adjusted income per common share is raised to between $3.90 and $4 per share assuming 66.3 million shares outstanding.
We are pleased to introduce first quarter 2007 guidance. Our Q1 2007 sales guidance is between $400 million and $410 million. Consistent with previous years, our sales guidance does not include other revenues. Our first quarter 2007 adjusted net income is between $59 million and $66 million, resulting in basic adjusted income per share of $0.90 to $1. Our guidance assumes 66 million shares outstanding, including stock option expense and continues to exclude amortization of intangibles.
2006 was an exceptional year. We've exceeded our expectation due to an exceptionally strong pain franchise and continued growth in our CNS franchise. In 2007, we look to maintain our leadership position in these areas and continue building our oncology franchise.
That concludes our opening remarks. We will now open this call to you and your questions.
Question-and-Answer Session
Operator
(Operator Instructions). And we will take our first question from Greg Gilbert with Merrill Lynch.
Greg Gilbert - Merrill Lynch
Thanks. Good afternoon. Frank, I bet your wife didn't think she has much influence on the timing of these events.
Frank Baldino
It's one of those things we just say yes there.
Greg Gilbert - Merrill Lynch
My first question is for Frank and perhaps Lesley. Is it the dialog that you are having with the FDA that makes you confident that the agency is considering only the labeling and not the ultimate approvability on NUVIGIL?
Frank Baldino
Greg. That's a really good question. I'll give you my view and then we'll turn it over to Dr. Russell to give you her view. The reason we think that is because -- if you remember the last press release we put out on this matter, we stated that there where no questions on NUVIGIL in that release. And the only questions related to the single case of rash and how to characterize it. And that was -- during that telephone conference, our group asked the FDA directly, are we talking about labeling here, especially this individual case? And the answer was, yes. So, may be Dr. Russell will add some further color to that.
Lesley Russell
We know that this is under actual review now and we are having beginning dialogs with the agency. And it's all around labeling and specifically around the one case of possible Stevens Johnson Syndrome that we had in our SPARLON clinical trial. So, there is really nothing to suggest that there was anything additional above and beyond labeling at this point.
Greg Gilbert - Merrill Lynch
Okay. Thanks. And secondly, for Kevin, are both the Barr and Watson pieces reflected in generic ACTIQ line? And can you tell us exactly what that number represents? Is it just profit? Is it the sales that you have cogged against?
Kevin Buchi
It's the sales that we have cogged against, Bret -- Greg, sorry. We recognize, as you know, our own sales of branded generic through Watson.
Greg Gilbert - Merrill Lynch
Right.
Kevin Buchi
We recognize sales of materials that we shipped to Barr. We then recognize cost of goods against those sales. So it's just a sales number.
Greg Gilbert - Merrill Lynch
And when you talk about two to three months in the trade in aggregate, would you view that as a kind normal for a generic product or did you say that because we should expect a work down closer to your sort of one month-ish level for other products?
Kevin Buchi
In all honesty, I don't think we yet know enough about the generic business to be able to make an awful good judgment of that. We basically follow Watson's recommendations and fill the channels for the levels that they feel were appropriate for a newly launched generic. The good news, as you know, is that the generic sales are pretty small number for us in the overall picture of our P&L. And so, the amount of inventory that we are talking here about here in dollar terms is actually fairly modest.
Greg Gilbert - Merrill Lynch
And lastly for Bob. Can you share with us what percentage of FENTORA scripts you would characterize as it switches from ACTIQ versus switches from pills versus new patients or how you look at it?
Bob Roche
Yes, Greg, the pattern is changed a lot and I think very positively over the weeks and now months that FENTORA has been on the market. When we first brought the product to market, the vast majority of the business was actually coming from switches from ACTIQ that quite frankly, we had not anticipated. We went into this marketplace looking to change physician behavior and prescribing moving forward, not necessarily actively having them switch ACTIQ patients over to FENTORA, which is what was happening and what caused that real heavy bolus of business coming through in the first couple of weeks.
Right now, what we are seeing is that the business is coming to a very small degree from ACTIQ, probably less than 15% to 20% of total scripts from ACTIQ. There is business actually coming from the other generic products out there, the Barr and Watson products. But the majority of new patients were actually coming over from other short-actings and a variety of other treatments that are available for treating pain of this nature.
Greg Gilbert - Merrill Lynch
Thank you.
Operator
Thank you. We will take our next question from Brett Holley with CIBC World Markets.
Brett Holley - CIBC World Markets
Hi, thanks for taking my question. My question is around the timing of the sNDA for FENTORA in non-cancer indication. Did you give a timeline of when we would actually have data from the ongoing 12-week trial, and should we expect an NDA later in second half of '07 or earlier?
Bob Roche
I will try to remember what we are public on here, Brett, I think we said, second half of 2007 and that’s the story we’re sticking to.
Brett Holley - CIBC World Markets
Okay. So, could we expect the 12-week data at sometime mid-year then or towards--?
Bob Roche
I think you are going to get everything you need in the second half of 2007. It will be a data dump as usual. Usually, as you know, we put out top-line information to give you a feel for what the primary endpoint was in the study and what level of significance was achieved. We give a brief comment on the tolerability of the drug. We point you to the nearest medical meeting, which is going to be presented, and reaffirm the filing date that we have planned in the second half. And that’s what you should expect.
Brett Holley - CIBC World Markets
Okay. And then, I guess my last question is just concerning the FTC, has there been any kind of movement on the provisional sediments with the – notified you of any kind of evolution and their thought?
Frank Baldino
We have John Osborn with us today, Brett. So, he can answer those questions.
John Osborn
No, Brett, nothing really to update beyond what we've said before on the calls and beyond what we’ve disclosed.
Brett Holley - CIBC World Markets
Okay. Fair enough. Thank you.
Operator
We will go next to Donald Ellis with Thomas Weisel Partners.
Donald Ellis - Thomas Weisel Partners.
Thank you very much for taking the call. First question I have is regarding the co-promote agreement with Takeda. My guess is you probably realized little benefits from that yet. When do you expect that to really start kicking in and producing top-line sales for you?
Frank Baldino
Well, let me have Bob answer that question. Remember a couple of things though, last year around July-August timeframe, I believe it was July, Takeda put 500 reps on this in the second-line. And I think I have been pretty forthcoming with everyone that 80% of your sales come from first-line detail, that's why we are very pleased that January of this year, they had another 250 sales reps with PROVIGIL as a first detail. And Bob, why don’t you tell them what we are seeing so far?
Bob Roche
Yeah. Your comment is actually pretty accurate from the standpoint of past performance. We didn't see a tremendous amount of uplift, not that we really expected going through the end of 2006. But, what we've seen is a -- I would say a more rapid growth in the number of primary care prescribers than we've ever had before. And although the productivity for these prescribers is generally pretty low, I think it’s certainly indicative of some building momentum in that sector. And as we go through now the first quarter of 2007 and really expect to see some more motion here, I am very encouraged by the feedback that we are getting from our guys in the field and that we are getting from our partners at Takeda. And I think we are all very hopeful that this will begin to grow even more rapidly. As Frank was mentioning, first position details really are crucial here, and keep in mind that these Takeda representatives are being compensated from the incentive perspective very heavily on PROVIGIL here in terms of their total balance. So, we've got their attention here. We know that they are excited and we are looking forward to some good results.
Donald Ellis - Thomas Weisel Partners.
So, you have 500 reps within the second position and an additional 250 reps in the first position?
Bob Roche
That’s exactly right. And when you add that to the 400 sales people that we have out there that are carrying the Cephalon business card, we have got well over 1,000 reps calling on physicians of every description for PROVIGIL and we're anticipating more than 1.5 million details on PROVIGIL to the variety of specialists and primary care docs, who we see as good targets. And that is just so far beyond any kind of attention and focus that we have been able to provide to this marketplace that we are looking forward to some really positive outcomes.
Donald Ellis - Thomas Weisel Partners.
Okay, thanks. Just a couple of quick questions, is it a good idea for us to model the fourth quarter of the year tax rate a little bit lower than the first three quarters?
Kevin Buchi
Not necessarily, Don. What happened in the fourth quarter of this year is that Congress passed the R&D tax credit, kind of, retroactive to the beginning of the year. So, we had kind of a catch-up adjustment, if you will, in the fourth quarter. It didn’t make a huge difference to the overall tax rate for the full year, I think it went from 36 to 35 or so, but it did make a difference in the fourth quarter rate. So I think that was just kind of a one-off legislative event.
Donald Ellis - Thomas Weisel Partners.
Okay. And last question I have is about the IMS numbers. Historically, you guys have reported less than what IMS reports, which is reasonable. But for the last two quarters, you guys have reported individual product sales a little bit above what IMS is reporting. Has something changed in the channels they are looking at or the way they report their data that you are aware of?
Frank Baldino
When you say reporting, are you referring to sales reporting, or are you referring to our -- when we gave our script numbers?
Donald Ellis - Thomas Weisel Partners.
Your reported product sales versus what IMS reports as product sales?
Frank Baldino
Got you, okay, comparison of sales to comparison of scripts, which simply is a great thing and--
Kevin Buchi
Yeah, absolutely, and the prescriptions that are written in a period and the dollar value that are associated with those prescriptions are what is shown on the IMS doc. It’s on a monthly basis. The numbers that we report are ex-factory sales, factored downwards by the difference between gross and net. So, those numbers were always going to be different. Over time, they should more or less approximate one another, but there have been many periods in the past where IMS dollar sales have been above our ex-factory sales and vice versa.
Donald Ellis - Thomas Weisel Partners.
Okay, great. Thank you very much.
Operator
We will take our next question from Adam Greene with J.P. Morgan.
Adam Greene - J.P. Morgan
Thanks. Good afternoon. I am hoping you could discuss the usage of FENTORA in the marketplace from -- based on the IMS data we are seeing, kind of a migration towards the higher strengths, the higher dosages. I was wondering if this was the function of titrating to the higher strengths, now the doctor are more comfortable with it or if it’s new start to higher strengths or what exactly is going on there? And then also because of this we would see an increase in a dollar per Rx. And finally, if there was any stocking in the quarter for FENTORA?
Frank Baldino
Well, let's have Kevin answer your last part of that question about stocking and then we will turn over to Bob to talk about who is using FENTORA and why today. Kevin?
Kevin Buchi
Yeah. There was absolutely FENTORA stocking in the fourth quarter. This was the first quarter we had sales of the product. And so, there was some inventory that was built. The inventory that we have out there is what I would view as fairly modest amounts and fairly normal amounts for a product at this stage of its launch. So, not an unusual amount of stocking, but there was certainly some, Adam.
Adam Greene - J.P. Morgan
Okay.
Frank Baldino
And Bob, the question on use today--
Bob Roche
Yeah. Yeah, Adam, you have the bunch of them.
Adam Greene - J.P. Morgan
Yes.
Bob Roche
Let me answer the ones that I remember and then you tell me which ones I forget. In terms of the average prescription, what we are definitely seeing is an increase both in the number of tablets and the strength per tablet on average. So, the average prescription is growing in value for us in a very positive way and that's something that we had projected. In terms of what the drug is actually being used for, we promote the product, as you know, for breakthrough pain in patients with cancer and docs are using it there and in a wide variety of other areas. We presume more or less mirroring their usage of ACTIQ. This product has been around for a long, long time. Doctors are very comfortable with it and -- fentanyl I am referring to. And our job now is to get them comfortable with FENTORA, and that's something that I think we are beginning to do very well.
Adam Greene - J.P. Morgan
Okay. So we should continue to see an increase in value per prescription going forward then?
Bob Roche
I think that that will be a trend that continues, yes.
Adam Greene - J.P. Morgan
Okay. Thanks.
Operator
We'll take our next question from Corey Davis with Natexis Bleichroeder.
Corey Davis - Natexis Bleichroeder
Thanks very much. I don't know Bob or Frank who wants to answer this. But how much of a difference would you say, if at all, has all the investigations in everyone's marketing practices changed your ability to promote your products the way you always have and things like speaker's EME programs.
Bob Roche
I think, Corey, this activity is going on nationally with I believe 150 companies now are getting involved in and well over 500 products being looked at, just a sheer magnitude of that, because everybody pause for sure. But our practices have always been within the regulations and we continue to follow them as our compliance people would outline them. While we continue to adjust to the interpretations that are out there, we believe we are well in compliance and we will follow the plan we set forth.
Corey Davis - Natexis Bleichroeder
Okay. And secondly, how long do you think it will take you to finish the complete label expansion package on NUVIGIL and when would the data start to trickle out? I assume that it wouldn't you all the way to get the label expansion approval through 2010, as you mentioned when you start to switch PROVIGIL or would it?
Bob Roche
Well, I think, there is a lot of goals of NUVIGIL. One is, we are very excited about what we are seeing with the drug and we are very excited about what we think the potential for that drug is. We are going to do a number of spreadings. I am going to have Dr. Russell here outline what we are doing for years to get a better feel for what's involved here. I think there is a chance to get some of this in a label by 2010, but there is also an opportunity of some quality publications out there before then and then follow it up obviously with label expansion. Lesley, why don't you give him for a feel -- for your feel for the kind of things we are looking at, at NUVIGIL?
Lesley Russell
We are really beginning to explore the use of NUVIGIL outside of the conventional sleep disorders, looking at areas of cognition and fatigue. So, patients with schizophrenia have cognitive impairment, we want there is some information suggested. There maybe utility in treating well controlled schizophrenic patients from that psychosis perspective with a product like NUVIGIL to improve their cognitive impairment. We are also looking at areas of fatigue like cancer related fatigue. Clearly, a huge unmet need in the cancer world either as a result of their chemotherapy or radiation therapy, although underline disease. Fatigue is one of the most significant complaints they have and there is no marketed drug approved for fatigue in cancer. And then, we are also looking at areas of Parkinson's disease which clearly have -- 50% of all Parkinson's patients have accepted sleepiness as a side effect and also some cognitive impairment. So, a lot of areas where we believe NUVIGIL may have an effect. And clearly, if Phase II programs provide some data, we would then move into Phase III programs with a view to broadening the label for NUVIGIL.
Corey Davis - Natexis Bleichroeder
Okay, great. And then last question, probably for Frank. I think -- I don't want to miss quote you -- in the past, you've said that, your ultimate goal would be to make Europe about 40% of the total corporate sales. So, A, was that correct? B, is that kind of still the goal? And C, how would you characterize your ongoing business development activities over there?
Frank Baldino
I think, Corey, a 40% of our business has a great diversification strategy being fully dependent on the US market is, yeah, although a market out there for sure, that's market-driven operation. It's also a risk. So, we made decision a couple of years of back to start expanding our diversity program to get Europe a bigger contributor to our top line. Clearly, our top line is growing at such a fast rate that every time we talk about this is our job gets a little harder in that arena. But we see plenty of opportunity in Europe from two areas. One is, the organic growth in the products we have. ACTIQ is doing very well there. PROVIGIL, modafinil is doing very well there and growing. And some of the French products are continuing to grow as well as some of the opportunities in other territories. And second of all, we think there are plenty of M&A opportunities in Europe as well. So, we're going to grow Europe the same way we have grown America, both organically and through acquisition. And I very much like to get to the 40% goal. But we are growing quickly and that goal becomes more complicated as time goes on. But I think we can get there.
Corey Davis - Natexis Bleichroeder
Great, thanks. And great quarter as always.
Frank Baldino
Thank you.
Operator
Next, we will go to Eric Schmidt with Cowen and Company.
Eric Schmidt - Cowen and Company
Good afternoon. Are you familiar -- are you aware of any other generic version of ACTIQ that might come to the market over the course of 2007, and is there any such genetic contemplated in the guidance?
Frank Baldino
Well, Eric, how are you today?
Eric Schmidt - Cowen and Company
I am well, Frank. How are you?
Frank Baldino
Good. It's hard for us to get our arms around the genetic marketplace, the new thing for us. We are only playing in this temporarily until FENTORA becomes as large as ACTIQ was in the past and probably a lot more. So our information in the generic world is probably as good as yours. We don't know of any generic that's been filed to-date other than the two that are on the market Barr's product and our product through Watson. And as far as your question about the guidance, we did in our guidance for 2007 plan for another generic answer near the end of the year. So that's already in the guidance.
Eric Schmidt - Cowen and Company
Okay. And then, about your stated intention to execute on the PROVIGIL to NUVIGIL switch circa 2010. I assume by that time you believe that you might have a broader label for NUVIGIL, is that correct in some of these other indications and maybe you could talk a little bit about your timelines there?
Frank Baldino
Well, first of all, let me glad to use the word circa 2010, because the actual time we do this depends on a lot of factors. One is, what the study show for NUVIGIL going forward etcetera. We are in a wonderful position there. We've got PROVIGIL through 2012. You know the history of the company. We didn't expect to be there. It's a great opportunity to continue to grow and understand the PROVIGIL market and grow this thing past $1 billion in sales through 2012. And we would like to take advantage of that growth and add another product to that mix and sort of have a major presence in the wakefulness arena for another decade or so, hopefully, far beyond all our livelihoods in this area. But nonetheless, we think NUVIGIL, even though it's a great drug today, the more work we do, the more characterize its utility in the sleep-wake world. Lesley talked about new entrees into the fatigue world, new opportunities into the cognition world. The more we understand individuals' role there and more we can get it the label, the more we can get it published out there, the better drug NUVIGIL is going to be. So, if we have an opportunity to take this $1 billion plus franchise of PROVIGIL forward for another decade, we would like to do it on the back of something that’s even better, and that is sort of the simple plan, and we will see what the data brings us in the next couple of years.
Eric Schmidt - Cowen and Company.
Okay. And then, last question for Kevin on the guidance, is where does the extra 10 million in operating profit come from? It looks like you have essentially, inclusive of the $30 million stock compensation charge, raised the net income guidance by 10 million, but -- and I am slow at this of course, but I can’t find out where it is in revenue and expenses et cetera.
Kevin Buchi
The bottom-line, Eric, is that the guidance ranges at this point in the year are fairly broad. We think the year is off to a good start and so we raised the numbers a little bit to kind of round up the numbers and make them roll off the tongue a little easier from an EPS perspective.
Eric Schmidt - Cowen and Company.
Okay, thanks a lot.
Operator
Thank you. We will take our next question from Jim Birchenough with Lehman Brothers.
Jim Birchenough - Lehman Brothers
Hi guys.
Kevin Buchi
Hi Jim
Frank Baldino
Hi Jim.
Jim Birchenough - Lehman Brothers
So, why don’t you just drill down on CNS franchise sales estimates for '07, within that 950 to 975 million range, what’s in there for NUVIGIL if anything? Is it the 50 million-increase in your guidance that we are seeing here? And secondarily, what’s the sensitivity to any NUVIGIL contribution to any labeling that you might get?
Frank Baldino
We’ve got nothing in the CNS guidance for NUVIGIL. Our assumption is that we would not launch -- we would choose not to launch NUVIGIL in 2007 at this point, Jim. The $50 million increase in guidance in the CNS franchise, the $50 million decrease in other was simply a result of an error I made, unfortunately the last time I gave guidance. We mistakenly classified GABITRIL previously in other. So, we are simply moving GABITRIL into its proper category.
Jim Birchenough - Lehman Brothers
Great, and then, just on the other end of it, to the extent that the FDA main label for pediatric -- that single case of pediatric Stevens-Johnson or supposedly Stevens-Johnson Syndrome, what percent of PROVIGIL sales right now are assumed by the pediatric population?
Frank Baldino
Do we have that number here, Bob? It's pretty small.
Bob Roche
It's less than 2%. I don’t know exactly what the number. You are talking about pediatrics in below the age of 12?
Jim Birchenough - Lehman Brothers
Yes.
Bob Roche
Yeah. I mean it will be in the 2 to 5% range of that.
Kevin Buchi
That’s a pretty small number, Jim.
Bob Roche
We can get that number back to you. But, it is inconsequential in the total sales number, Jim.
Frank Baldino
And don’t forget Jim, in the PROVIGIL label today, this case is clearly into label for PROVIGIL today. So, that had no impact on sales. And I guess the broader question you asked before about the impact of this child's rash on NUVIGIL. You can also ask the same question related to PROVIGIL, which is probably the more relevant in the '07 timeframe, since we are now launching NUVIGIL, right? And the answer is little to none, because the drugs aren’t indicated for children. We don’t expect to sell it to children. It's not used today in children. So, whatever the impact is, it's going to be very, very small if anything. And again, it's already in the PROVIGIL label and well documented there.
Jim Birchenough - Lehman Brothers
And just the final question, looking ahead to your oncology opportunities, as we start to think about the likelihoods of your succeeding there, can you remind us what the endpoints are in the TREANDA and CEP-701 trials?
Frank Baldino
Yes, we will. We have Dr. Russell right here to do that for Asia.
Lesley Russell
In the TREANDA, non-Hodgkin's lymphoma study the primary endpoint is overall response rate with the secondary endpoint of remission duration. In the CEP-701 AML study, again the primary endpoint is complete remission rate.
Jim Birchenough - Lehman Brothers
Any comments on what the magnitude of benefit is you need to show on each of those studies?
Lesley Russell
For the non-Hodgkin's lymphoma study this is under Barr agreement with FDA and basically they have largely said we need to replicate the findings in our Phase II programs, which was an overall response rate around 70%. And CEP-701 study, it is a randomized study so we will be comparing the addition of 701 to standard re-induction therapy just to re-induction therapy alone, so we would obviously looking for a statistically significant difference.
Jim Birchenough - Lehman Brothers
Great, thanks.
Operator
Next we will go to Michael Rockefeller with Morgan Stanley.
Michael Rockefeller - Morgan Stanley
Good evening guys.
Kevin Buchi
Hi, Mike.
Michael Rockefeller - Morgan Stanley
Great quarter.
Kevin Buchi
Thank you.
Michael Rockefeller - Morgan Stanley
So, I guess just on the spending here, can you just kind of explain a little what actually you're spending on here with SG&A, I mean, your launching FENTORA, but is it primarily FENTORA, is it Takeda or is it the VIVITROL, can you just kind of characterize that a little bit for us?
Frank Baldino
Well, first of all -- let Kevin form these numbers together, SG&A -- in fact all products Mike, whether it’s PROVIGIL, FENTORA, VIVITROL, etcetera. I think I have got, Kevin enough time to come up with some real answers for you.
Michael Rockefeller - Morgan Stanley
Well, you guided to 590 or 610 back in the second quarter, and you came in at 650 for year. So just sort of wondering where that extra spending came from?
Kevin Buchi
I mean there is couple of places. The Watson gets a percentage of our top-line revenue from generic OTFC. Generic OTFC was higher than we have predicted. So there was a bump in SG&A associated with that. We paid some money to Takeda for their efforts. We increased spend in Scientific Communications at the end of the year to fund additional studies with our products. We spent a little more money on FENTORA launch cost at the end of the year. As you know, we were having a pretty strong earnings year in 2006 and so I didn't feel particularly bad about investing little additional money in the fourth quarter, Mike.
Michael Rockefeller - Morgan Stanley
Got you. All right. Thanks a lot guys.
Operator
We will take our next question Gary Nachman with Leerink Swann.
Gary Nachman - Leerink Swann
Hi. Good afternoon guys, few questions. First why we are not seeing a faster erosion of branded ACTIQ? That's a pretty interesting dynamic. May be you can comment on how formularies are at this time and so the price increases for that product?
Kevin Buchi
I think it's always hard to predict what the generic erosion rates going to. There are lots of models out there, but most of those models are faced with multiple generics and in this case we really have generic even though -- there is authorized generic with Watson for us. There’s really one generic out there Barr. So there is very few models of that in the industry to follow. So you guys have a tougher job there than normal and we can appreciate that. We’re delighted that the erosion has been slower, for sure. And Bob, do you have some added color for these guys?
Bob Roche
Well I do, and there is an interesting phenomenon that seems to take place with the opioid analgesics that the rate of decline and the overall depth to which the product, the originated brand actually drops is somewhat less than what you would expect for a regular small molecule. Right now we are running at around 30% brand share of the total prescriptions, which is -- although it's ahead of our expectations, it's not markedly ahead. And if we are able to maintain something above what you would expect the project to drop to after 12 months on the market of a generic then I think we'll be in pretty good shape.
Frank Baldino
The other way to look at this, Gary is -- for you guys need something to model here, something to look at, look at the DURAGESIC erosion curves. DURAGESIC erosion curve is a drug in the same category. It's actually fentanyl. And I think you will find that the track of ACTIQ erosion is pretty much overlaps the freed aren't close to what we see with DURAGESIC. So, that will give you a good model to use going forward.
Gary Nachman - Leerink Swann
Okay. And the fact that FENTORA is priced at a discount, has that been a benefit with respect to formularies? Have you felt that so far?
Bob Roche
Yeah, it certainly has been a benefit. Keep in mind, that with generics available on the market, the true discounted price of the OTFC is available out there have been dropping. But FENTORA still maintains I think a really good place vis-à-vis the ACTIQ product and the generics. But what we really need to do and what we're working very hard to do is to differentiate FENTORA as best we can from ACTIQ and the generics. And we're, I think pretty successful in that.
Keep one thing in mind that, generics are really not written per say. Physicians write two types of prescriptions out there for oral fentanyl products; one, ACTIQ and the other, FENTORA. When the patient takes a prescription for ACTIQ to the pharmacy, it may or may not get substituted with the generic. And the fact that we are maintaining a good portion of the brand is I think a really positive statement about the brand loyalty and the equity that we built on ACTIQ over time, which unfortunately works a little bit against this when we are trying to position FENTORA very positively in the marketplace. But I think we are in good overall position and our results for 2007 should be very strong.
Frank Baldino
Gary, there is another story here. When you get a chance to talk to the doctors about ACTIQ and FENTORA, we talk about FENTORA. And the fact that FENTORA is offered at a lower price is very attractive to physicians. Everyone is sort of centered into the price of healthcare, especially the price of pharmaceuticals today. So, in addition to the pressure on pricing, it's really nice for the reps to have a story to tell about pricing that's favorable for FENTORA versus ACTIQ brand. That's the reason why we did that. And that's what really coming forth -- that we are seeing from the doctors.
Gary Nachman - Leerink Swann
That's helpful. And when we take it a step further and model out or we are trying to model out for 2007, how should we think of the entire breakthrough pain market? Are you guys forecasting prescriptions will grow this year or contract? In the early part of the year it seems that it may have contracted somewhat. And does that also have to do with just greater challenges with formularies? How should we think of the whole market in 2007?
Frank Baldino
I am going to -- this is Frank. I am going let Bob give you a little more color. These are really good questions. I think the rapid-onset opioid market has retracted a bit. That's probably our own doing. Remember what happened at the end of '06. We increased the price of ACTIQ substantially, putting a lot of price pressure on the market. So, it drove it down from that perspective. And we stopped fundamentally detailing ACTIQ and these are very detailed sensitive products. So, we created the market and we -- our behavior at the end of '06, the transition of FENTORA actually caused the market to retract a bit. Now having said that, Bob is going to tell you the upside of what FENTORA is going to do to further expand the market.
Bob Roche
Right. As you see, the market is declining and it's declining somewhere between really 10% and 20% week-on-week on average, and that's been going on for several months now. Our expectation is that that rate of decline is going to slow. And that especially, as we begin to generate and share the new data for FENTORA in back pain and naturopathic pain, that we are going to begin to see a significant up-tick in the way that FENTORA is adopted preferentially to any of the other products that are available out there.
So, right now, we are going through a bit of downturn in the overall market. FENTORA, keep in mind, already has acquired a 23% market share here. So, this is well beyond anything that we would have projected at this time. And we are going to continue to try to grow share and at the same time bring the market back up to that 7000 to 8000 prescription number per week that was on prior to the middle of last year and then grow it well beyond that with the availability of new data in the new indications.
Gary Nachman - Leerink Swann
Okay, great. And then last question, just shifting gears on VIVITROL. Are there plans for getting another product to the addiction specialist sales force to better leverage those guys? Or is VIVITROL really a 100% of the focus for the foreseeable future?
Frank Baldino
Well, it's hard to predict the future. If I can do that, I would be on the beach in the river somewhere. But looking at VIVITROL, I think we've got a lot of work to do with VIVITROL. It's going to be our focus for the foreseeable future. We have got to learn how to sell VIVITROL better and we have got to give VIVITROL to become a mainstream product in the treatment of alcohol addiction or alcohol abuse. We got a ways to go there and it's going to take all our focus to get it there.
As far as the long-term future is concerned, is there a business to build, I think is what you are asking us. Is there a business to build in the addiction marketplace? I think there is. The couple of publications on PROVIGIL actually in cocaine abuse that we are pretty excited about. We may be thinking about how to exploit that in the future. And of course, there are opportunities for VIVITROL itself beyond alcoholism that alchemist has been speaking about in opioid addiction and things like that. And all of these are exciting opportunities, but make no mistake about it. Our near-term focus is on VIVITROL and building the addiction market the way we built the breakthrough pain market in the America and the way we have built the fleet from this franchise as well.
Gary Nachman - Leerink Swann
Okay. Thank you.
Operator
Thank you. And today's final question will come from David Buck with Buckingham Research Group.
David Buck - Buckingham Research Group
Yes. Thanks for taking the question. Couple of shorts ones. First, is there any update on any interactions with the various Attorneys General on your product marketing? Secondly, can you give us a sense, Frank, when you would expect the Takeda efforts to breakeven And maybe for Bob, what do you think accounted for the slight slowdown we've seen in PROVIGIL TRx growth over the last --?
Frank Baldino
Dave, they are great questions. The last one for Bob is particularly acute here. So, I will let Bob answer that one first, if he wishes. So, we are breaking all kinds of records on PROVIGIL, Bob, do you want to answer that one?
Bob Roche
Yeah. I mean in fourth quarter -- if you look at 2006 on a quarter-by-quarter basis, our growth for the first quarter was about 15% over the same quarter of 2005. Our growth for the same quarter was 17%, then 19% and then 20%. So, to actually accelerate a growth pattern for a product that’s been on the market since February of 1999, is something which I give tremendous praise and kudos to my sales and marketing. This is not something you see everyday. In early 2000 and both around the end of the year, as you well know, David, the overall prescription trends basically slow down. And then that happens in December, it happens in January. I mean we have seen even a slowing in FENTORA over that timeframe, in a product which is on a rapid growth phase.
So, this is not a period of time that you would really look at to be indicative of anything that you would anticipate for the rest of the year. Let's get through quarter one here and get into quarter two, quarter three when we have typically been growing all of our products and see what happens. But we are very, very proud, I think of the performance of PROVIGIL and very hopeful that it will continue to grow very rapidly in the future.
David Buck - Buckingham Research Group.
I guess that said how do we interpret all the additional efforts of Takeda? I mean, I would have thought that the growth rate would have been creeping up and perhaps accelerating as these reps come onboard.
Frank Baldino
Well, David, first of all, that’s a really good point to make. If you look at the market mix of where we are selling PROVIGIL today, our number one market is the primary care market, and our fastest growing market is the primary care market. Now our efforts in that market have been minimal at best over the last two years or three years. So you got to give Takeda some credit for giving us a new market that’s not only our largest, but our fastest growing. So you could be seeing the beginnings of a major impact there. And also, remember what I said earlier and this is something I have learned over the years here watching our marketing and sales guys create markets, second details are not that effective. I was very pleased to see the increasing awareness of PROVIGIL among primary care, unaided awareness over the years from Takeda -- over last year from Takeda’s second position detail. This year, two things are happening, one is we are being much more aggressive on the marketing side, especially some of the programs that Takeda is participating in for the first time. And, also 250 sales reps dedicated to PROVIGIL in the first-line position. That's a big deal. Bob threw out some numbers for details. There are several million details, Bob, right? What's the number that you have been out?
Bob Roche
We are anticipating about 1.5, 1.6 million PROVIGIL details in 2007.
Frank Baldino
Which is something we have never been even close to in the past, so you got to believe that all that effort to a drug that’s proven itself to be exceeding detail0-sensitive over year, you are going to see an impact. I think it takes time. This is why we didn't build the primary care sales force ourselves. Let's let Takeda do what they do best, we'll do we do best, and I think we'll be very happy with the results. For your first question, Dave, about the Attorney General stuff, I don't want to forget about that, although I would like to. I have got John Osborn here, our General Counsel, who can fill you within that stuff.
John Osborn
Hi, David, I think you said the Attorney General, just to be clear, there is only one Attorney General with whom we have been cooperating and that is Mr. Blumenthal's office in the State of Connecticut. We have, as you know, disclosed the status of that for some time and we continue to work with them. And, of course, we would announce publicly any developments that are significant. So I just have to leave it at that. There really isn’t anything new to report, but we continue to work with them.
David Buck - Buckingham Research Group.
Okay. Thank you.
Frank Baldino
This concludes today's conference call. Thank you for your participation.
Operator
You may disconnect your lines at any time.
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